Together, Nokia and Microsoft Renew a Push in Smartphones-nytimes

February 11, 2011

Together, Nokia and Microsoft Renew a Push in Smartphones

By KEVIN J. O’BRIEN

LONDON — Nokia, the struggling world leader in mobile phones, said on Friday that it would discard its own cellphone operating system and begin using software made by Microsoft, in an alliance to shore up the halting efforts in smartphones of two market leaders.
The announcement by Stephen Elop, the former Microsoft executive hired by Nokia in September as the company’s first non-Finnish chief executive, was an admission of failure by Nokia, which had helped define the mobile phone age in its infancy.
The alliance is also a gamble, perhaps a last-ditch effort for both Nokia and Microsoft to gain a lasting foothold in the booming market for sophisticated smartphones, where Apple’s iPhone and Google’s Android software are leading the way in technology innovation.
“Nokia is at a critical juncture, where significant change is necessary and inevitable in our journey forward,” Mr. Elop, a Canadian who led Microsoft’s business software division before moving to Nokia, said in a statement. “Today, we are accelerating that change through a new path, aimed at regaining our smartphone leadership, reinforcing our mobile device platform and realizing our investments in the future.”
Microsoft’s operating system software dominates the PC industry. But mobile devices like smartphones are expected to surpass desktop and laptop computers this year as the main way to gain access to the Internet. Microsoft has only 2 percent of the global market for phone software.
At least at the outset, the alliance may “Microsoft will have the rationale to really double down with its investment in the smartphone platform and ecosystem,” said Al Hilwa, an analyst at IDC.
One measure, in addition to market share, of how far Microsoft trails in building that ecosystem is the number of software applications developers have created for the Microsoft Windows Phone 7 operating system. The Microsoft applications store, though growing rapidly in recent months, has about 8,000 applications, Mr. Hilwa said. By contrast, more than 350,000 applications have been developed for Apple’s iPhone.
“It’s a big win for Microsoft today,” said Pete Cunningham, an analyst with Canalys, a research firm in Reading, England. “Windows Phone 7 is no one’s priority. But now Microsoft has a leading vendor committed to use the platform. For Nokia, the big question is how quickly can the company execute on this. That has been one of the major issues.”
Nokia held meetings with Google and considered Android, Mr. Elop said in an interview, but was concerned that Google, not Nokia, would benefit from a alliance. Android, which Google gives away to phone makers, is widely used by Samsung, LG, HTC, Huawei, Motorola and Sony Ericsson.
Nokia risked becoming a commodity maker of mobile phones by ceding software to Google, Mr. Elop said. An alliance with Google, he said, “felt like giving up, not like fighting back.” With Microsoft, Mr. Elop said, “this is now a three-way horse race.”
Microsoft, analysts said, most likely offered Nokia more generous support than Google in paying for engineering assistance, revenue-sharing terms on mobile advertisements, search and map services. In 2007, Nokia paid $8 billion for Navteq, a mobile mapping service, which Google undermined by offering Google Maps free.
“It looks like a good deal for Microsoft, but far riskier for Nokia,” said David B. Yoffie, a professor at the Harvard Business School. “It’s choosing a new platform and an unproven one in Microsoft’s smartphone software.”
Dropping Symbian, Nokia’s operating system, will be temporarily disruptive to Nokia’s product plans. About 200 million phones around the world use Symbian and the company expects to sell another 150 million more before halting its development and switching to Windows. Investors were skeptical of the Nokia-Microsoft partnership. Nokia shares dropped 14.2 percent in Europe. Microsoft shares closed down 0.9 percent.

Mark Sue, an analyst at RBC Capital Markets who attended the investors’ conference where the announcement was made, compared the alliance to “two unpopular kids in high school with rich parents suddenly becoming prom king and queen.” He added: “It was clear that Nokia needed to do something different. But there is a lot of skepticism about whether this will work.”
During a joint interview with Mr. Elop, Steven A. Ballmer, Microsoft’s chief executive, dismissed the initial market reaction and skepticism surrounding the alliance. “Objectively, is today a better day or a worse day for Microsoft?” Mr. Ballmer asked. “Objectively, is today a better day or a worse day for Nokia? Ding! It’s a better day for both. So whatever people thought yesterday, they should think something a lot more positive today.”
Mr. Elop also sidetracked Nokia’s one-year collaboration with the chip maker Intel, called MeeGo, to produce a new generation of Nokia smartphones. It will become a long-term open-source project designed to develop new kinds of devices, Mr. Elop said. The collaboration failed to produce a cellphone in its first year.
Nokia’s share of the global handset market, once more than 50 percent, is now falling rapidly as its rivals close in. According to the Gartner research firm, Nokia’s global share fell to 29 percent in 2010 from 36 percent a year earlier as Apple and Research In Motion, maker of BlackBerry, both posted gains.
The announcement left some big questions unanswered. Mr. Elop declined to say when Nokia and Microsoft would sell the first handsets, later clarifying in a presentation to analysts that significant numbers would be ready by 2012. He also said he was not prepared to say if and when Nokia and Microsoft would collaborate on a tablet computer.
He said the alliance would coincide with “significant” job cuts, the scope of which he said remained to be determined after talks with its unions. Nokia employed 132,427 people at year-end.
During his two-hour presentation with financial analysts, Mr. Elop, who usually comes across as earnest and serious, had the audience laughing when explaining the new organizational chart of his leadership team, with his name at top. “If this works, I will be C.E.O.,” he joked, pointing to his name.